An oil giant under siege

The Russian oil giant Yukos faces the prospect of re-nationalisation, with its assets being seized by the state for non-payment of tax dues. Is President Putin preparing to strike at the oligarchs?

in Moscow

THE big question doing the rounds in Moscow is whether Yukos, Russia's richest oil major, is facing re-nationalisation, which could be brought about by a clean transfer of the company's stock from its majority holders to the state or entities sponsored by it. Speculation in this regard is supported by the recent sting operation undertaken by the Federal Tax Ministry against the beleaguered company.

Bailiffs accompanied by armed officers descended on Yukos' headquarters in central Moscow last fortnight, demanding the payment of a $3.4 billion tax claim for the year 2000 that was upheld recently by a court. They carried copies of an execution writ that authorised the Tax Ministry to seize money from Yukos' bank accounts and freeze the company's assets. They also ordered that an inventory be taken. The bailiffs gave Yukos five days to cough up the massive tax claim. Subsequent to this action, the Tax Ministry announced a second tax claim of $3.4 billion, including fines and interest for the year 2001.

A desperate Yukos announced that the seizure of its bank accounts would force it to stop production within five days as it would not be able to pay the operating costs. Yukos stated that it had in excess of $1 billion in its bank accounts, which fell far short of the required amount. The company faces a default of $2.6 billion in international loans if its bank accounts are frozen. In a statement, Yukos said: "The action of the bailiffs to arrest the company's bank accounts poses a direct threat to Yukos' current production activity, which is of strategic importance for Russia's fuel and energy sector." The statement indicated that the seizure of the bank accounts "poses a direct threat to making current tax payments... and also throws into doubt the company's ability to make payments to its international creditors." So far, international creditors have maintained silence, and right now it is unclear whether they would come forward to announce a default on the $2.6 billion in loans extended to Yukos. Further, Yukos' credits have emergency clauses calling for their immediate repayment if the circumstances of the company become problematic. Among the creditors are Bank Menatep, the majority shareholder company founded by Yukos' former chief Mikhail Khodorkovsky, and a consortium of western banks that include Citigroup and Societe Generale.

The announcement of the second tax bill has caused considerable consternation within the company. Analysts are of the opinion that this announcement, coupled with the freezing of the bank accounts, is targeted at increasing the pressure on the beleaguered company's owners, so that they are forced, out of desperation, to hand over their controlling stake in the company to the state, or those sponsored by it, in lieu of taxes. This is a direct hit at Menatep and Khodorkovsky, its main shareholder, and his partner, Platon Lebedev. The two men have spent over eight months in jail after their dramatic arrest last October at gunpoint on charges of large-scale fraud and tax evasion. A Yukos spokesperson voiced the fear that the second tax bill "should automatically lead to default". Further, the tax authorities have yet to calculate the claims for 2002 and 2003. Analysts expect that the total claim could well cross $10 billion. This makes the bankruptcy of Yukos rather imminent. Analysts are of the opinion that Yukos may manage to meet the first tax claim, but there is no way by which it can meet the second, as that would require an all-out sale of assets. Analyst Steven Dashevsky, head of research at Aton, said in Moscow recently: "A combination of the two tax bills will almost definitely lead to the sale of core assets. Yukos in its current shape and form is not likely to exist."

Meanwhile, Yukos has been making frantic efforts to reach an out-of-court settlement with the government, which have not worked. Proposal after proposal has failed to draw a favourable reaction from the authorities. As the bailiffs presented their execution orders for the payment of taxes for 2000 to Yukos, the company offered its stake in Sibneft, the company it had earlier gained via merger, as collateral, but to no effect. The Yukos stake in Sibneft has a current market value of $4.7 billion. The Yukos spokesman said: "We offered the Sibneft stake as collateral. But as soon as they heard the word Sibneft, they just stood up and left." Before this offer, Yukos had proposed making a partial payment for the 2000 tax claim and suggested an out-of-court settlement, in which Yukos indicated its willingness to pay $1.17 billion over two years. However, the company then refused to pay the balance amount, which was charged under the heads of fines and penalties.

Analysts are no longer split about where Yukos is headed; they feel that it will not survive in its current configuration. James Felkner, head of research at Troika Dialog, said in Moscow Times, "If there are any negotiations, the level of brinkmanship is superior to that of the Cuban crisis. These guys are just laying on more and more charges." He further added, "There is a high probability of the ownership reverting to the state. The thing is being gobbled up."

Meanwhile, the international community and foreign investors are watching the tax strike against Yukos with growing anxiety. The World Bank has voiced its alarm, warning in its latest report on Russia that "the uncertainty surrounding the beleaguered Russian oil giant, Yukos, is weighing on the economy because of the damage to investor confidence." The World Bank's chief economist for Russia, Christopher Ruehl, told the press recently: "Is it a one-off? As long as we do not have an answer to this question, Russia has a problem of confidence. The key problem is destabilisation."

Other analysts are also wondering whether the strike against Yukos is a single case or will be repeated against big business generally. Analysts are split on this. Many feel that it is a single case, and will set an example for the big business and a warning that companies must pay taxes, avoiding tax evasion schemes, and, above all stay out of politics. Khodorkovsky had earned President Vladimir Putin's ire by reneging on the unwritten pact under which oligarchs were given a free run in business as long as they stayed clear of politics. Khodorkovsky crossed this line openly by gaining influence in the Duma (Parliament) and in Russia's Communist Party. Some commentators feel that the Yukos example could be applied more generally and many Russian business barons who benefited from the dubious privatisation deals of the 1990s could be in trouble. The premiere Russian daily, Kommersant, noted interestingly: "This is not dialogue, it is a royal summons. Big business is painfully facing up to the government's demands for social responsibility. This is capitalism with Putin's face."

As analysts mull over the fall-out of the strike against Yukos, the former oil giant's shares fell by 8.9 per cent to 210.41 roubles, after the report of the new tax claim for the year 2001. The stock has plunged by 51 per cent since Khodorkovsky's arrest, shaving $21 billion off Russia's second biggest oil producer's market value. There is a feeling in Moscow that the market was caught "off guard," especially after positive statements given out by Putin a week earlier indicating that the government would not let Yukos go bankrupt. Putin had then said: "The Russian authorities are not interested in the bankruptcy of a company like Yukos. The government will do all it can to prevent the collapse of the company. But what happens in the courts is a separate matter. The courts should speak of this themselves." This statement had generated a false sense of security in the market on the matter, despite the fact that Putin had hinted that the courts would function as they pleased.

Meanwhile, the world's attention remains focussed on Russia and the strike against Yukos. Many investors and concerned parties are waiting to see whether this strike remains confined to Yukos or develops into a witch-hunt against big business. There is speculation that the country is headed for re-nationalisation of some kind in the energy and natural gas sector, with the state maintaining complete control over the development and maintenance of oil pipelines. Interestingly, Yuri Trutnev, Russia's Natural Resources Minister, highlighted recently the need to deprive prominent oligarchs of their largest oilfields. He said the oligarchs had left two billion tonnes of oil and four trillion tonnes of gas for their heirs. This is a direct hint at the reserves of oil and gas in the fields that Khodorkovsky, Mikhael Fridman and Roman Abramovich and others bought at throwaway prices in the mid-1990s. Trutnev said: "Nobody is working these oilfields nowadays. It means the fields aren't bringing in any revenue for the state." He added: "What we need are new owners who will actually develop these oilfields."

Yukos' fate, Khodorkovsky's trial, which is to be resumed on July 12, and the future of the Russian energy and natural gas sector could be inextricably linked. What remains to be seen is whether the link is going to be moderate or extreme.